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— Postmortem —
An experienced acquirer, WellPoint wanted WellChoice to bolster its East Coast presence, increase its roster of multistate employer clients and generate operating synergies. But Indianapolis-based WellPoint has faced a multitude of woes, including a burst of management turnover, most notably the resignation of Larry Glasscock as CEO (he's still chairman). Add to that the filing of class actions against it, pricing missteps, faulty program design and the loss in 2007 of more than 450,000 people covered by corporate insurance plans that WellPoint provides. WellPoint also has more than $9 billion of long-term debt outstanding.
The difficulties have led investors to fret. WellPoint's price has fallen to around $54, from the $78.81 it traded at on Dec. 28, 2005, the day the WellChoice deal closed. Things may not brighten soon, either. Value Line Publishing Inc. analyst Randy Shrikishun projects earnings per share will fall to $5.50 a share, from 2007's $5.57, before rebounding to $6 next year. Still, by almost all accounts, the WellChoice acquisition made perfect sense. The insurer was one of the top Blue Cross Blue Shield providers in the U.S. and the biggest in the New York metropolitan area. The deal boosted WellPoint's total medical membership by about 5 million. "I don't see any issues with WellPoint from an operational standpoint," says Bradley Ellis, the director of Fitch Ratings' North American insurance ratings group. "No company is perfect, but they've done a very good job. Most of the acquisitions they've done have gone pretty well." The deal came 10 months after Anthem had acquired WellPoint. While Anthem was the buyer, the WellPoint name was retained, and the new entity became the largest managed-care company in the U.S. But the goodwill the WellPoint name conferred took a hit once executives started leaving. Glasscock retired in May 2007, elevating Angela Braly, previously executive vice president and general counsel, to CEO. Soon after, WellPoint disclosed that CFO David Colby had been asked to resign for code-of-conduct violations. Other managers left over the past year, too, including its chief accounting officer, chief actuary, the CEO of the former commercial and consumer business division and the subsequent CEO of its consumer business unit. WellPoint also disappointed Wall Street this year, when its first-quarter net income of $588 million was down 25% year over year. In a first-quarter conference call March 10, Braly blamed pricing and claims processing problems, higher-than-expected medical costs, a changing economic environment and lower-than-expected fully insured enrollment. "It's hard to grow enrollment when companies aren't hiring employees," Ellis says. Meanwhile, WellPoint's medical loss ratio -- the percentage of premium revenue that the company spends on healthcare costs -- has risen, to 82.4% last year, from 80.1% in 2005. Analysts aren't worried. The Blues brand is strong, and WellPoint has had strong cash flow over the past few years and a solid operating and pricing record. Unlike some rivals, WellPoint is not reliant on Medicare, and it has the largest commercial membership among health insurers. "In our opinion, WellPoint has significant competitive advantages that will support outsize returns over the long run," wrote Morningstar Inc. analyst Matthew Coffina in a recent research note. The company reorganized its reporting segments in October into three units to better develop cross-selling medical and specialty products. A third-party auditor also reviews the books quarterly. "We know what our issues are and have plans to fix them," Braly said in an April 23 analysts' call. WellPoint refused comment, but sources still say its WellChoice deal was smart. Today it serves 35.4 million members and is the independent licensee of the Blue Cross and Blue Shield Association in 14 states. "WellPoint has been a good acquirer without any service disruptions," Coffina says. "They bought a pretty good asset and pretty much left it alone." |
The ink had barely dried on the contentious $16.5 billion 
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